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Thursday, March 9, 2017

HOUSTON (BLOOMBERG) - Harold Hamm, the billionaire shale oilman, said the US industry could "kill" the oil market if it embarks into another spending binge, a rare warning in a business focused on fast growth to compete with Opec.

The statement, at an energy conference in Houston on Wednesday (March 9), comes as top shale companies announce large increases in spending for this year, and the US government says domestic oil output next year will surpass the record high set in 1970. Opec ministers have said they are keeping a close watch on shale production to decide in late May whether to extend their oil-supply cuts into the second half of the year.

Oil prices plunged 5 per cent on Wednesday to their lowest level this year, falling just above US$50 a barrel, on investor concerns about unbridled growth in America's shale basins swelling US inventories.

US production "could go pretty high," Hamm said at the CERAWeek by IHS Markit conference in Houston, one of the largest gatherings of oil executives in the world. "But it's going to have to be done in a measured way, or else we kill the market."

Hamm runs Continental Resources, one of the biggest shale producers in the country with drilling operations that run from the Bakken in North Dakota to Oklahoma. He also was an early supporter of Donald Trump's candidacy, and remains an informal adviser to the president on energy.

After oil prices doubled over the past year, US shale drillers have announced big increases in spending for 2017. Anadarko Petroleum Corp this week said it planned to invest 70 per cent more this year than in 2016. Last month, EOG Resources Inc, another big shale producer, said it will spend 44 per cent more this year than last. Exxon Mobil Corp plans to spend a third of its drilling budget this year on shale.

Shale producers are staging the biggest surge in drilling since 2012, with the number of oil rigs rising to more than 600 this month, nearly double the level of June. They are rushing to spend again after the Organization of Petroleum Exporting Countries and Russia agreed last year to cut its supplies, boosting oil above US$50 a barrel after a two-year price rout.

The drilling boom has been led by the Permian Basin, which extends from western Texas and south-east New Mexico, and the Scoop and Stack plays in Oklahoma.

The Energy Information Administration this week said US production will rise to 10 million barrels a day by the end of next year, more than 10 per cent higher than now. If so, shale drillers will capture market share from Opec, largely filling the increase in global oil demand. "We are witnessing the start of a second wave of US supply growth," Fatih Birol, the head of the International Energy Agency, told Bloomberg in an interview on the sidelines of the Houston conference.

Saudi Arabia Energy Minister Khalid Al-Falih earlier this week warned CERAWeek attendees that what he called the green shoots emerging in the US oil industry were perhaps growing "too fast." ConocoPhillips CEO Ryan Lance quipped afterward that the green shoots looked more like "trees" to him.

Al-Falih, in a clear message to the US industry, said it would be "wishful thinking" to expect that Saudi Arabia and Opec "will underwrite the investments of others at our own expense" through production cuts.[This is bad news. If Shale Oil causes prices to fall, and OPEC responds by cutting their output to shore up prices, then Shale oil will ramp up production because prices are high, and there is profit to be made. If OPEC responds by raising their output because prices have fallen and so have their revenue and reserves, then there will be an oil glut, and prices will fall further.Even if OPEC maintains their production levels, Shale Oil could still increase their production to generate more revenue, and there will still be an oil glut. And prices would fall.Isn't that great?In the short term, you may pay less for petrol, or at least petrol prices won't rise. But if fuel prices are low, then it would encourage our continued use of fossil fuels and carbon pollution. And it would discourage exploration and innovations in alternative fuels and energies. And we continue to spew carbon into the atmosphere and raise global temperatures. ]